Chapter03

Business Business Market Market

ManagementManagement

33rdrd edition edition

Understanding Firms as Understanding Firms as CustomersCustomers

Chapter 3

Copyright © 2009 Pearson Education Publishing as Prentice Hall

Business Market Management, 3rd edition Chapter 3-2

Section II: Section II: Understanding ValueUnderstanding Value



Chapter 3: Understanding Firms as Chapter 3: Understanding Firms as CustomersCustomers

OverviewOverview

I. Understanding Purchasing Orientation

II. Understanding How Purchasing Works with Other

Functions and Firms

III. Understanding the Purchase Decision Process

IV. Summary



OverviewOverview

Understanding firms as customers:Understanding firms as customers: process of learning how companies rely on a

network of suppliers to

add value to their offerings add value to their offerings

integrate purchasing activities with those of other integrate purchasing activities with those of other

functional areas and outside the firms functional areas and outside the firms

make purchase decisionmake purchase decision



UnderstandingPurchasingOrientation:

•Buying•Procurement•SupplyManagement

UnderstandingValue forPresent andProspectiveCustomer Firms

EvaluatingSupplierPerformance

Learning theCustomer’s PurchaseProcess

UnderstandingCustomer Requirements andPreferences

Understanding How Purchasing Works with Other Functions and Firms

Understanding the Purchase Decision Process

Value Managementas aCooperative Framework

Adding Value to thePurchasing ProcessThrough Buying Teams

Working with Suppliersand Across Functions



I.I. Understanding PurchasingUnderstanding PurchasingOrientationOrientation



Understanding Purchasing Understanding Purchasing OrientationOrientation

Purchasing: process of acquiring resources and capabilities for the firm from outside providers

Purchasing Orientation: philosophy that guides managers who make purchasing-related decisions and delineates their domain and span of influence



Value Network DefinedValue Network Defined

Set of organizationsSet of organizations that perform portions of

business processes designed to create:

Economic and Technical BenefitsEconomic and Technical Benefits

Service and Social BenefitsService and Social Benefits

The organizations equitably shareequitably share in resulting

benefits



Source: Adapted from a chart by Professor Sunil Chopra, J. L. Kellogg Graduate School of Management, Northwestern University, 1999.



Understanding Purchasing Understanding Purchasing OrientationOrientation

When the business market manager understands his or her client’s purchasing orientation, the manager can better decide:

whether to serve the accountwhether to serve the account

how to adapt the market offering to better how to adapt the market offering to better

meet the customer’s requirements and meet the customer’s requirements and

preferencespreferences

how to craft a persuasive sales presentationhow to craft a persuasive sales presentation



Buying OrientationBuying Orientation

Central Pursuits Obtain the best combination deal: price, quality, and supplier

availability

Maximize power over suppliers

Avoid risk wherever possible

Buying:Buying: executing discrete transactions with suppliers, often for a single item

Buyer’s prime objective:Buyer’s prime objective: reduce its annual total spend of acquisitions in a given year



Obtaining the Best DealObtaining the Best Deal

Buyer treats quality and availability as “order “order qualifiers”qualifiers”

PricePrice band:band: range of acceptable prices around the average price paid for product or service

± 3% of average± 3% of average

Distributive negotiation:Distributive negotiation: customer and supplier assume that “value pie” is fixedWin-lose with one gaining more pie at the expense Win-lose with one gaining more pie at the expense

of the other of the other



Supplier Cost AnalysisSupplier Cost Analysis

Supplier Cost Analysis:Supplier Cost Analysis: review of actual

and estimated cost data for a potential vendor

1.1. Buyer obtains all information possible on supplier Buyer obtains all information possible on supplier

costs directly from suppliercosts directly from supplier

2.2. Industrial engineers estimate remaining supplier Industrial engineers estimate remaining supplier

costs costs (materials, labor rates, equipment utilization)(materials, labor rates, equipment utilization)

3.3. ““Reasonable” profit margin added to arrive at “fair” Reasonable” profit margin added to arrive at “fair”

priceprice



Maximizing Power Over SuppliersMaximizing Power Over Suppliers

CommoditizationCommoditizationBuyers eliminate or downplay any points of difference between value elements of competing offerings

Attempt to equalize and remove Valuef f and Value

aa from the fundamental value equation

MultisourcingMultisourcingCustomer firm requests price quotations from and places order with a number of suppliersPlays one supplier against anotherSuppliers cut prices to secure more business

Sole-SourcingSole-SourcingOne supplier produces a needed product or service (e.g. rare raw materials, patented products, new technologies)

Single-SourcingSingle-Sourcing

Buyer purchases the firm’s total requirement from one vendor even though alternatives exist



Tactics for risk avoidance:

1.1. Follow established procedures and rely on Follow established procedures and rely on

proven vendorsproven vendors

2.2. Seek quotes from at least 3 competing Seek quotes from at least 3 competing

vendors and divide an order among several vendors and divide an order among several

supplierssuppliers

Avoiding RiskAvoiding Risk



Developments in BuyingDevelopments in Buying

Target PricingTarget Pricing

Through market research, buyers determine the target price for their product or service among firm’s customers Estimates what portion of product price should come from each systemProduct is divided into subsystems and then partsBuyer negotiates with supplier knowing the price they need to attain

Global Global SourcingSourcing

Breakthroughs in communication and transportation allow buyers to take advantage of the international markets

Advantages:Advantages: reduced prices, increased quality, and new technologies

Disadvantages:Disadvantages: Added risks such as materials contamination, suspect product quality, and unreliable deliveries

E-SourcingE-SourcingOnline purchasing allows customer firms to simultaneously reap price reduction benefits from multi-sourcing and global sourcing

Tools:Tools: comparison agents, online reverse auctions, and eRFQscomparison agents, online reverse auctions, and eRFQs

Defeaturing or Defeaturing or Cooperative Cooperative

PricingPricing

Customer and supplier managers work together to identify superfluous product features, attributes, and performance specification that can be eliminated or relaxed in exchange for a lower price



The Procurement OrientationThe Procurement Orientation

Procurement:Procurement: broadening the domain and span of influence of purchasing

Firm seeks to increase productivity through:

Improving qualityImproving quality

Reduced total cost of ownershipReduced total cost of ownership

Cooperating with suppliersCooperating with suppliers

For a typical firm, the cost of goods and services purchasedaccount for about 60% of net60% of net sales.sales.

A reduction of $1 in total sales costs has the same impact as $6 increase in revenues$6 increase in revenues.



Improving QualityImproving Quality

Quality:Quality: Conformance

to specifications that result in a

product which meets

customers’ expectations

Specification:Specification: the

offering that the firm is

seeking

UnderspecifiedUnderspecified

OverspecifiedOverspecified

Performance

Process

Technical or Material

Functional

Specifications



Total Quality Management (TQM)Total Quality Management (TQM)

TQM:TQM: a management

approach to an organization

centered on qualitycentered on quality, based

on the participation of all its

members and aiming at

long-term successlong-term success through

customer satisfaction



Reducing Total Cost of OwnershipReducing Total Cost of Ownership

TCO = Purchase Price +

Product or Service’s

Lifetime Expenses

-Salvage or

Resale Price



Total Cost of OwnershipTotal Cost of Ownership

Acquisition

Costs

Costs associated with securing an offeringSearch costsSearch costsProcessing ordersProcessing ordersDelivery costsDelivery costs

Conversion Costs

Costs when using an offeringWarehousing and handlingWarehousing and handlingInventory storageInventory storageMaterial processingMaterial processing

Installation, maintenance & Installation, maintenance & repairrepairOperatingOperating supplysupply costscostsCostCost ofof poorpoor qualityquality

Disposal Costs

Encompasses:RecyclingRecyclingEnvironmental protectionEnvironmental protectionWaste management expensesWaste management expenses



TCO AnalysisTCO Analysis

TCO Analysis:TCO Analysis: applies activity-based costing (ABC)

concepts and methods to quantify all expenses related to the

use of a product or service apart from price

Focuses on firm’s interfaces with suppliersFocuses on firm’s interfaces with suppliers

Focuses on expendituresFocuses on expenditures

Identifies firm’s major cost driversIdentifies firm’s major cost drivers

Often reveals opportunities to eliminate costsOften reveals opportunities to eliminate costs

• Corporate purchasing cards

Long-term benefits from e-sourcing comes from cost savings Long-term benefits from e-sourcing comes from cost savings

rather than price savingsrather than price savings



Cooperating with SuppliersCooperating with Suppliers

Cooperative relationships with suppliers, customer firms attempt to expand the “value pie”“value pie” for both firmsIntegrative negotiation: resources can be Integrative negotiation: resources can be

expanded to benefit both partiesexpanded to benefit both parties• Identify shared interests and goals• Freely exchange information with emphasis on

commonalities• Seek creative solutions that meet both side’s goals



Cooperating with SuppliersCooperating with SuppliersImproving QualityImproving Quality

Standardization Requirements:Standardization Requirements: establishing agreement on uniform identification for definite characteristics of:

QualityQuality

DesignDesign

Performance Performance

QuantityQuantity

Service Service

Quality Assurance:Quality Assurance: methods

and procedures for production

Statistical process controlStatistical process control

Product testingProduct testing

Defect preventionDefect prevention

Process inspections Process inspections



Target Costing:Target Costing: Focus is on reducing TCO. Require customer and supplier to work together, sharing technical, process and cost information

1.1. Customer managers set target price for productCustomer managers set target price for product

2.2. Determine a target cost for marketplace profitabilityDetermine a target cost for marketplace profitability

3.3. Evaluate TCO of various systems, subsystems, and Evaluate TCO of various systems, subsystems, and componentscomponents

4.4. Customer managers determine the TCO the firm can incur on Customer managers determine the TCO the firm can incur on the partthe part

5.5. Request supplier provide a solution that does not exceed the Request supplier provide a solution that does not exceed the determined amountdetermined amount

6.6. Supplier alternativesSupplier alternatives• Lower price of part to meet target cost

• Propose creative cost reduction program to achieve target price

Cooperating with SuppliersCooperating with SuppliersImproving QualityImproving Quality



The Supply Management OrientationThe Supply Management Orientation Supply Management:Supply Management: entails the integration

and coordination of purchasing with other functions. Considered a series of “value-adding “value-adding activities.”activities.”Within the organizationWithin the organizationWith other firms in the value networkWith other firms in the value network

• Customers• Customers’ customers• Resellers• Suppliers’ suppliers



1. Focus all firm’s efforts on delivering value to end users

2. Craft a sourcing strategy around the firm’s core competencies and resources

3. Build a supply network that efficiently completes required business processes

4. Sustain highly collaborative relationships with select supplier and sub-supplier firms

The Supply Management OrientationThe Supply Management OrientationFour Central TenantsFour Central Tenants



Source: Ravi Venkatesan, “Strategic Outsourcing: To Make or Not to Make,”Harvard Business Review (Nov.-Dec. 1992): 103.

The Strategic The Strategic Sourcing ProcessSourcing Process



Focus on End-UsersFocus on End-Users

Supply Management proactively directs the entire supply network to meet the requirement of end-users through the following:Managers participate in:Managers participate in:

• Market research projects• Customer advisory councils• Personnel exchange programs

Managers relay value assessment results of products Managers relay value assessment results of products and services to the development groupand services to the development group

Managers use market research findings to reengineer Managers use market research findings to reengineer business processesbusiness processes



Craft a Sourcing StrategyCraft a Sourcing Strategy

Sourcing Strategy:Sourcing Strategy:

1. Identify core competencies

2. Divide the firm’s product and services into systems, subsystems, and components

3. Categorize systems, or subsystems if systems too broad (strategic, nonstrategic)

4. Firm outsources or produces itself the remaining strategic systems and subsystems



Build a Supply NetworkBuild a Supply Network

Lean Enterprise:Lean Enterprise: a group of individuals, functions, and legally separate but operationally synchronized companies Mission:Mission: collectively analyze and focus a collectively analyze and focus a

value stream so that it does everything value stream so that it does everything

involved in supplying a good or service (from involved in supplying a good or service (from

development and production to sales and development and production to sales and

maintenance) in a way that provides maintenance) in a way that provides

maximum value to the customermaximum value to the customer



Build a Supply NetworkBuild a Supply Network

Under lean enterprise concept:Purchasing becomes a center of expertisePurchasing becomes a center of expertisePurchasing becomes a repository for Purchasing becomes a repository for

knowledge of best practices knowledge of best practices Supply managers disseminate research Supply managers disseminate research

findings and experiences to colleagues across findings and experiences to colleagues across the companythe company

Rely on a network of direct suppliers and a Rely on a network of direct suppliers and a larger number of 2larger number of 2ndnd and 3 and 3rdrd tier suppliers tier suppliers



Types of Supply ModelsTypes of Supply Models

Supply Network Supply Network ModelModel

Traces the value-adding step needed to produce an offering from the customer backward through the variety of 1st, 2nd, and 3rd tier suppliers

Make to Stock Make to Stock ModelModel

Common design model for securing predictable quantities of MRO itemsManufacturers that produce standardized products to demand forecast, lengthy distribution channels, and local dealers that provide one-stop shopping, local delivery, and credit services



Types of Supply ModelsTypes of Supply Models

Build-to-Order Build-to-Order ModelModel

For example, used in acquiring Personal Computers (PCs) in a large one-time transactionUtilizes mass customization and flexible manufacturing, rapid delivery, and encourages substitution of new technology in product design

Continuous Continuous Replenishment Replenishment

Model or ECR Model or ECR SystemSystem

Model used for essential spare partsA single vendor manages a customer’s entire plant inventories, immediately replacing out-of-stock items through EDI based logics network

Design-to-Build Design-to-Build ModelModel

To obtain access to next-generation technologyCustomer and supplier R&D personnel jointly develop a new product. Supplier produces the one-of-a kind product in a single batch.



Sustain High Collaborative Sustain High Collaborative Relationship with Select SuppliersRelationship with Select Suppliers

Value-in-Use:Value-in-Use: difference in value minus the difference in price that a supplier’s offering provides a customer firm relative to a competitive offering

VIUfa = (Value

f - Value

a) - (Price

f - Price

a)

Value-in-Use Price:Value-in-Use Price: monetary amount at which the customer has no preference between the supplier’s offering and the next-best alternative offering

VIU Price

f

= Pricea + (Value

f - Value

a)



Apply Purchasing Apply Purchasing Portfolio ManagementPortfolio Management

Firms purchase a wide variety of product and servicesCompanies may have to adopt multiple Companies may have to adopt multiple

sourcing strategiessourcing strategiesBuild unique supply network Build unique supply network

Sustain diverse relationships with supplier as Sustain diverse relationships with supplier as

a function of the supply situations it facesa function of the supply situations it faces



Leverage Items

(raw materials)

Criticals(new technology)

Generics(MRO items)

Bottleneck Items

(essential spare parts)

High

CUSTOMER VALUE

Low

Low CUSTOMER RISK High

Purchasing Portfolio MatrixPurchasing Portfolio Matrix



Purchasing Portfolio GoalsPurchasing Portfolio Goals

1. Add value through Functionality-cost Functionality-cost

managementmanagement

ServiceService

Effective Effective

administrationadministration

Sourcing and Sourcing and

integration of integration of

innovationinnovation

2. Reduce risk through QualityQuality

AvailabilityAvailability

AssuranceAssurance

Agile responsivenessAgile responsiveness

Sourcing activitiesSourcing activities



II.II. Understanding How Understanding How Purchasing Works with Purchasing Works with

Other Functions and Other Functions and FirmsFirms



Value Management as a Value Management as a Cooperative FrameworkCooperative Framework

Value Management (VM):Value Management (VM): systematic use of value techniques as a general problem-solving method in:BusinessBusinessResearchResearchAdministrationAdministration

Value Analysis:Value Analysis: method of value assessment that customer firms use to evaluate supplier offerings



Value ManagementValue Management

Strategic level:Strategic level: Executives learn to “manage by value”

Tactical level:Tactical level: Personnel focus on “management of value”



Value ManagementValue Management

Value Management:Value Management: allows a firm to

better focus and efficiently sustain its

operations, to gain a clearer understanding of

the needs and priorities of its customers, and to

deliver optimal value to the customer with

trade-offs between performance and cost



Adding Value to the Purchasing Process: Adding Value to the Purchasing Process: Buying Teams Buying Teams

Buying Teams or Buying Centers:Buying Teams or Buying Centers: all

those members of an organization who become

involved in the buying process for a particular

product or service

Member rolesMember roles

Buying situationsBuying situations

TasksTasks



Buying SituationsBuying Situations

Straight Rebuy

The company has considerable buying experience and requires little or no new information about the offering

Modified Rebuy

Customer firm has had experience securing the product or service, but managers need to reevaluation of alternatives

New taskUnknown what the functional or technical specification of the offering should be



Buying Team TasksBuying Team Tasks

Commodity Procurement Strategy (CPS) teams

Supplier Certification Teams

Specification Teams

Supplier Performance

Evaluation Teams



Working with Suppliers & Across Working with Suppliers & Across FunctionsFunctions

Develop Supply Resources

Seek internal and external expertise to find and qualify new suppliers worldwideSeek internal and external expertise to find and qualify new suppliers worldwide

• Managers in diverse functional areas

• Technical staff from operations and R&D

• Technical service personnel provide consulting and training

Improve Existing Offerings

Progressive customer firms collaborate with suppliers Progressive customer firms collaborate with suppliers

• Conduct joint Value / TCO assessment to find process improvements and material

substitutions

• Determine most economic lot-sizing for supplier production

• Establish long-term contracts for dedicated production lines

• Rethink and reallocate task from supplier firm to customer firm or vice versa



Working with Suppliers & Across Working with Suppliers & Across FunctionsFunctions

Contribute to New Offering Realization

Early supplier involvement programs (ESI)Early supplier involvement programs (ESI)

Early purchasing Involvement programs (EPI)Early purchasing Involvement programs (EPI)

Purchasing managers: technology “matchmakers”Purchasing managers: technology “matchmakers”

Purchasing managers: serve as “reality check” Purchasing managers: serve as “reality check”

Cost-Effective Product Introduction (CEPI)Cost-Effective Product Introduction (CEPI)

• Purchasing managers scrutinize the process

• Alert engineers when they are about to specify high-cost, long lead-time, and overly

customized parts, and recommend standard parts as alternative

• Identify and advocate suppliers with proven records for reliability, delivery, quality, and

capacity utilization

Purchasing managers serve as watchdogs for expensive and over engineered Purchasing managers serve as watchdogs for expensive and over engineered

parts, and provide detailed cost estimates that help designers better forecast the parts, and provide detailed cost estimates that help designers better forecast the

total cost and profitability of new productstotal cost and profitability of new products



III.III. Understanding the Understanding the Purchase Decision Purchase Decision

ProcessProcess



Understanding Customer Understanding Customer Requirements and PreferencesRequirements and Preferences

Three sources of uncertainty that make it difficult for customers to understand their own requirements and preferences

Needs Needs UncertaintyUncertainty

Difficulties customers have in interpreting the exact nature and importance of goods and services that firms require

(Example: How often will a piece of machinery fail and what is the severity of the consequences?)

MarketMarket

UncertaintyUncertaintyBuyer’s inability to predict how many alternative suppliers will be available and the quality of goods and services forthcoming

TransactionTransaction

UncertaintyUncertainty

Inversely related to the customer’s confidence that suppliers have easy-to-use procedures for doing business, processing orders accurately, and providing reliable and timely deliveries



Customer Satisfaction

Surveys

Service Usage Patterns

Activity-Based Costing

Activity-Based Planning

On-Site Training

Online Services

Microsoft Magazines

Usability Testing

Supportability Testing

Beta Testing

Off-Line Plus

WISH Lines

Joint

Development

Projects

Known

Microsoft’s

Understanding of

Customer Requirements

Unknown

Known Customer's

Understanding of

Their Own

Requirements

Unknown

Microsoft Customer Support Requirements MatrixMicrosoft Customer Support Requirements Matrix



Map Customer Activity and Value CycleMap Customer Activity and Value Cycle

Activity Cycle is the steps required to: produce,produce, productively use,productively use, recycle, andrecycle, and dispose an offeringdispose an offering

Value Cycle captures the changes in the worth across the Activity Cycle steps



Learning the Customer’s Purchase Learning the Customer’s Purchase Process Process

BuyGrid Framework Rebuy:Rebuy: Customer has track record of purchasing a given product from

a given vendor and can avoid many steps

New Task:New Task: Customer has no experience purchasing good or service. Hence the customer must go through the entire process

Ongoing Relationship:Ongoing Relationship: Customer may be able to eliminate some of the steps from the process.



Evaluating Supplier PerformanceEvaluating Supplier Performance

Best Practices:Balanced scorecardsBalanced scorecards

• Review Price, Quality, and Availability– Subjective questionnaires– Summarize category result in a single subjective index– Operational measures

• Scrutinizing Total Costs– Review costs associated with supplier nonperformance

• Tracking Supplier Value



Scrutinizing Total CostsScrutinizing Total Costs

Supplier performance Index,

SPI (item)

=

Extended purchase price + nonperformance costs

Extended purchase price



Tracking Supplier ValueTracking Supplier Value

Supply managers conduct thorough and demanding evaluation of suppliersEstimate the benefits,Estimate the benefits,

Total costs, andTotal costs, and

Prices paid to each vendorPrices paid to each vendor

Supplement direct vendor evaluations with own customer satisfaction studies

Goal:Goal: assess the impact of supplier contributions on end-user satisfaction



IV.IV. SummarySummary



SummarySummary Examined how firms secure resources from the external environment and

integrate them with their internal operations

Understanding firms as customers is the process of learning how: Companies rely on a network of suppliers to add value to their offerings,Companies rely on a network of suppliers to add value to their offerings,

Integrate purchasing activities with those of other functional areas and outside Integrate purchasing activities with those of other functional areas and outside

firms, andfirms, and

Make purchase decisionsMake purchase decisions

By understanding firms as customers, the market manager can better craft

responsive market strategies

Three purchasing orientations used in business markets: Buying orientationBuying orientation

Procurement orientationProcurement orientation

Value-based supply management orientationValue-based supply management orientation



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United States of America.

Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall

Chapter03

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